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December 4th, 2008
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Unhappy returns

Mutual funds have taken a hit in a clear indication of a worsening economy

By Bibiána Duhárová
Staff Writer, The Prague Post
October 8th, 2008 issue

The fallout on the Czech market from the U.S. and now the European financial crisis, has so far been difficult to gauge, but one clear indicator of trouble on the Prague Stock Exchange has been the startlingly poor performance of mutual funds in the past year.
After one of the largest stock price plunges in the history of Wall Street, the Prague Stock Exchange dropped 5.4 percent at the beginning of last week. Equity values on world markets fell closely on the heels of Dow Jones in the United States, and investors and active traders on financial markets posted hefty losses.
The U.S. government’s $700 billion bailout plan has been passed, but recent events unfolding in Europe indicate it won’t be enough to correct the world economy’s recent woes. Investors on Prague’s stock market will stand to lose even more as the U.S. crisis has become a European one as well.
But mutual funds have been on a downward spiral since January of this year, and equity funds have lost 30 percent on average in 2008. While these investments aren’t subject to the complete devastation shareholders have been victim to from fallen investment banks, there’s little hope of a turnaround any time soon.
Among the funds that have been most successful this year were bond funds Pioneer obligační, which showed a yield of 4.32 percent, followed by KB Bond with a 4.22 percent yield. But slight gains of select funds were overshadowed by the bigger losses this year. Among the worst performers was KB Real Estate Companies, which weathered losses of 50 percent in line with figures in the United States. Real estate funds are the least popular among Czech investors. Still, the drop in yields since the U.S. subprime mortgage crisis has had a great impact on real estate development in the Czech Republic. ČSOB’s Equity Fund–Central and Eastern Europe also experienced dramatic losses, dropping more than 45 percent.
The Czech Republic’s banking system may be safe for the time being, but world markets are closely connected and yields from funds and their value are benchmarked and measured according to Dow Jones. Several Czech mutual funds have appreciated investors’ assets this year, but only by single percentage points.
Nowhere to run
“With the fall of world financial markets, we also note drops in funds. They are, however, not subject to bankruptcy due to their complex governance,” said Martin Hanzlík, executive director of Czech Capital Market Association (AKAT). “Once the fund manager reports a major difference between fund yields and the Dow Jones index, only then does the fund investor have good reason to either leave the fund or invest in another fund. Currently, however, it would be a rash move since this is not just a local but a global problem, and investors have nowhere to run for profit. Everybody is caught in the same trap,” he added.
Private investors and institutions in the Czech Republic hold more than 296 billion Kč ($16.6 billion) in domestic and foreign mutual funds. According to AKAT, the overall investment volume of the 13 active members of AKAT reached 721.06 billion Kč in the second quarter of 2008, and overall mutual funds lost 255 million Kč, or 0.09 percent from 296.44 billion Kč in March to 296.19 billion Kč as of June.
The value of assets in foreign funds in the same period grew 1.89 billion Kč, a 1 percent increase, but domestic Czech funds lost 2.15 billion Kč, falling 1.35 percent. A decrease in assets was most notable in bond funds, followed by mixed funds. Money market funds, funds of funds, equity funds, secured funds and real estate funds posted only small increases. The most popular investment in the Czech Republic is money market funds, which currently boast the largest asset volume in the Czech Republic. According to Lukáš Buřík, AWD financial analyst, money market funds are currently investors’ only security and usually gain popularity in times of crisis and in falls on the share market.
Patience needed
While equity funds increased their assets, their performance was hit by the type of foreign investment they typically include. Marek Hatlapatka from Cyrrus capital markets consultants said the trend is hardly surprising and investors can be assured of an inevitable turnaround.
“The current development of equity funds is logical since they are one of those in which investors put the most money globally. Share markets will, however, rise again since all downfalls are followed by growth. It will take a longer time, but they will start reaching the top. Equity funds are long-term, and there is no reason to take out money, so it’s best for fund investors to wait,” he said.
Hanzlík added that not only should investors ride out recent events, but they should consider further investments when the time is right to buy.
“Now is actually a good time for investments into funds, because shares will go up, as this is the natural development of things. Selling at this time will only further confuse the situation on financial markets,” said Hanzlík.

Bibiána Duhárová can be reached at bduharova@praguepost.com


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